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Russia: Debt Repayment Plan Raises Concerns

Russia's threat to withhold a debt payment in the first quarter of the year may be a new setback to investor confidence. RFE/RL Correspondent Michael Lelyveld reports that the European Union may find it hard to ignore the incident when it considers a plan to double energy imports from Russia over the next 20 years.

Boston, 11 January 2001 (RFE/RL) -- For the second time in one week, Russia seems to have taken steps that could harm its own interests in energy cooperation with the European Union.

Following an outcry over the gas cutoff to Georgia on January 1, the Russian government seems to have compounded the damage to its image by suggesting that it may skip debt payments to official creditors in the first quarter of this year.

Although Russia has stopped gas deliveries to Georgia and other CIS countries many times before, the latest episode drew international attention, including criticism from the U.S. State Department.

On Monday, an editorial in the London-based Financial Times warned that the stoppage "is bound to raise some questions in western Europe, which depends on Russia for 42 percent of its gas imports and more in the future." The temporary shutoff was especially troubling because of Russian political pressures on Georgia, which had reportedly paid for its January gas deliveries in advance.

But Russia's signals on debt payments may be just as troubling for its prospective European partners. On January 4, a Russian Finance Ministry spokesman was quoted as saying that the government would not make first-quarter payments on $48 billion of inherited Soviet debt. The spokesman, Gennadi Yezhov, denied the missed payment would constitute a default, but he failed to explain the difference. The payment is estimated at $1.5 billion. Some Russian officials tried to downplay the issue before a weekend visit by German Chancellor Gerhard Schroeder, whose country holds 43 percent of the Soviet debt. But Schroeder's stay over Orthodox Christmas with President Vladimir Putin did little to settle the question. On Friday, the German Finance Ministry said that withholding payment was "not acceptable."

On Sunday, Putin stressed that Russia "is determined and will fulfill its financial obligations." But the statement fell short of an assurance that the government would reverse its decision to delay the first-quarter payment.

On Monday, the Paris Club of 19 official lenders issued a strongly-worded letter saying the group "does not condone any debtors' unilateral default." German officials were quoted as saying that Russia can well afford to service its debts, given the windfall profits from high oil prices last year. Moscow's delay in payments is widely seen as a tactic to further its bid for debt rescheduling. Although Russia's announcement last week came as a surprise, there were signs that the move may have been planned for some time. According to reports, the budget for 2001 contains $2.1 billion less than the amount due this year for debt service on the Soviet obligations. In other words, officials seem to have presumed that there will be either a rescheduling or a default.

Although the budget may lack the funds, the Central Bank of Russia reported last week that its hard currency and gold reserves stood at nearly $28 billion, almost 10 times more than the bank held when Russia defaulted the last time, during the ruble crisis of August 1998.

The common thread between the gas cut and the debt threat seems to be a willingness to use pressure without regard for the consequences. While Russia talks about skipping debt payments to Germany and the Paris Club, it is also talking to many of the same countries about investing in its energy sector.

Germany is Russia's biggest gas customer and an expected partner in an EU plan to double energy imports from the country in the next 20 years. The proposal would require massive European investment in resources and infrastructure, which Russia sorely needs. The question is how the government can expect to encourage investor confidence by threatening to default on debt payments to the same countries. Inevitably, the energy plan would involve many of the same EU banks and finance ministers who are concerned with the debt payment problem. But whether the first-quarter payment is made or not, the talk of deliberate default is likely to have a chilling effect.

Robert Ebel, director of the energy and security program at the Center for Strategic and International Studies in Washington, said: "It kind of makes you wonder whether one department is talking to the other."

In this case, all the contradictions seem to come together in Putin, who appears to have been involved directly in the government's strategies. Under former President Boris Yeltsin, surprise statements could be blamed on a lack of coordination. But now, that explanation is difficult, thanks to Putin's centralization of power.

Putin's thinking is a puzzle. But his actions suggest a confusion between persuasion and force. While the outcome is uncertain, energy investment in Russia is unlikely to look as attractive after the events of the past week.